Saturday, April 04, 2009

Financial Crisis 4 April 2009

Money's only purpose is to serve as a one-to-one counter for real wealth .

Real wealth is measured according to the criteria set out in

http://andreswhy.blogspot.com "Financial Crisis 31 Jan 2009"

Mainly

It is to satisfy the human needs , weighted according to the Maslow hierarchy .

1.Air to breathe

2.Water to drink

3.Food to eat

4.Clothes

5.Shelter

6.Weapons

7.Novelty

Deflation .

This happens when real wealth increases faster than the growth of the monetary system .

This has been of real concern just before the present crisis .

In fact , it is the present crisis .

The system hunts for stability by creating money in futures .

It creates money by discounting future earnings .

The Central Banks are not creating money fast enough to keep up with the accounting demand .

Literally billions of people are hauling themselves up by the their bootstraps . Creating enormous wealth . The number of dollars , euros , yuan , etc in circulation is not sufficient to reflect the wealth . But the governments concerned try to limit the creation of new money , under outdated theories .

The system promptly bubbles up in futures , which are inherently more unstable than a currency .

Historical examples :

There are many . I will mention two :

1.British Empire circa 1880

A gold based trading empire in an industrial revolution created wealth faster than the discovery of new gold , until the South African goldfields . This created an explosion of wealth .

2.The 1929 crash .

Post-WWI created new wealth , but the monetary system did not keep pace . A bubble in futures (stock exchange) followed . In the ensuing collapse , wealth-creation was decreased . War , in other words .

But the system enforced balance .

And for now ?

The fear is that inflation might follow the creation of trillions of dollars .

The real problem is that they are too modest .

The point is that the excesses of futures transactions reflect a real shortage of money .

The system needs and will need a continuous creation of money just to keep up with the demand in real-wealth creation .

Look at the scale . The world economy is about 100 trillion a year . Wealth creation is about 10% per year . This can be summed , even for the last 10 years this gives a demand for money of about 100 trillion dollars . The money creation systems cannot keep up .